Australian Bond Exchange Weekly Update
2nd August 2024
Key points
- Australian CPI increases for the June quarter
- Federal Reserve holds but signals cuts ahead
- Bank of England cuts
- Surprise hike for Bank of Japan
- China’s 10-year bond yield hits record low
Global Cash Rates & Inflation
- The Reserve Bank of Australia (RBA) Cash Rate now sits at 4.35%pa and the annual inflation rate in the year to June is 3.8%.
- The US cash rate (policy rate) is currently between 5.25%-5.5%pa and the annual inflation rate in the year to June is 3.0%.
- The Bank of England Bank Rate currently sits at 5.0%pa to fight an inflation rate of 2.0% in the year to June.
- The European Central Bank Cash Rate (deposit facility) is 3.75%pa, to fight an annual inflation rate of 2.5% in the year to June.
Australian CPI Increases for the June Quarter
The quarterly CPI data released this week shows that inflation increased by 1% in the June quarter, taking the annual inflation rate to 3.8%, up from 3.6% in the previous period.
This result was largely expected and will alleviate some concern given a higher-than-expected figure would have solidified the case for another RBA rate hike next week.
In fact, fears over another rate hike are rapidly subsiding and financial markets now ascribe a 40% chance of a move lower by November, and a rate cut almost fully priced in by February 2025.
While plenty of uncertainty remains, investors should be open to the possibility that the attractive returns available right now in fixed-income markets won’t last forever.
Federal Reserve Holds but Signals Cuts Ahead
The U.S. central bank voted to keep the Federal Funds rate steady at 5.25%pa – 5.5%pa but indicated that cuts could be coming in September, depending on the result of inflation, jobs and other economic data.
Inflation in the U.S. remains above the Federal Reserve’s 2% target, but Chairman Jerome Powell has indicated that the Bank could cut rates earlier, underscoring the pivot to rate cuts which are being seen in most developed economies .
Surprise Rate Hike for Bank of Japan
The Bank of Japan has hiked its key policy rate for just the second time since 2007, taking it from 0.10%pa to 0.25%pa as inflation remains stubbornly above the country’s 2% target.
In addition to touting further rate hikes, the Bank of Japan is also looking to unwind its massive bond buying program which has helped to stimulate economic growth for the past decade.
Both Japan and Australia are outliers in the sense that rate hikes are being considered, as the dominant position from central bankers around the world is a pivot to monetary easing.
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China’s 10-year Bond Yield Hits Record Low
China’s government 10-year bond yield fell to a record low of 2.17%pa as the world’s second largest economy continues to suffer from weak consumer spending and the fallout of a real estate market debt crisis.
The People’s Bank of China slashed two of its interest rates twice this week in a bid to boost its lagging economy, however, only time will tell on whether this can stem the tide of China’s slumping real estate values.
Bank of England Cuts Rates
The Bank of England has cut its Bank Rate by 0.25 bps, reducing it from a 16 year high of 5.25%pa to 5.0%pa.
The move follows the path of other major central banks including the People’s Bank of China, European Central Bank, Bank of Canada, Banks of Switzerland, and Sweden’s Riksbank.
Inflation has eased meaningfully in the UK and fell back to its 2% target in May 2024 for the first time since July 2021.
It is yet the latest example that the prevailing trajectory of interest rates remains lower across most of the developed world.
As such, now could be an opportune time to consider locking in some longer-term fixed returns, getting ahead of any potential rate cuts before they arrive.
Aussie Retail and Hospitality Businesses Failing at Record Pace
Data released by the Australian Securities and Investment Commission (ASIC) reveals that Australian retail and hospitality businesses are failing at their fastest rate on record as weaker consumer demand and higher costs of energy, food, wages and rents weigh on the sector.
The data demonstrates that Australia is heading into a weaker economic environment and as such, investors should remain cognisant of their exposures and risks to asset classes which are more predisposed to and reliant upon economic growth.
Corporate fixed-income securities are defensive assets and as such are well positioned to weather any economic downturn. Additionally, the Australian Bond Exchange only offers high quality fixed-income securities which have passed our rigorous credit testing and risk assessments.
For more information regarding available securities, get in touch with the Australian Bond Exchange today.
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Week Ahead
- RBA interest rate decision
- Australian business confidence
- Chinese inflation data
*Data accurate as at 02.08.2024
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